Social Media May Influence Your Credit Worthiness

Some lenders look at how you interact with friends and customers on Facebook and Twitter to decide whether you're a good loan candidate.

10 Facebook Features To Help You Get Ahead

(click image for larger view)

Tech startups and small businesses: Pay attention to your social presence. That's the message from a crop of new lenders that want to take your social data into account to determine the risk of awarding you loans.

Most people understand that how you interact on social media informs a number of decisions social networks make, from the ads they serve you on Facebook to recommendations for new people to follow on Twitter. But lenders are taking your social footprint to another level, requesting access to your accounts in order to determine whether or not they want to do business with you.

"These businesses have the theory that birds of a feather flock together, meaning that responsible members of credit will converse with responsible members of credit," said John Ulzheimer, credit expert at CreditSesame.com . "In other words, they're interested in who you're interacting with on social media and how you're interacting with them."

Take, for example, U.S.-based Kabbage, an up-and-coming online service that offers cash advances to small businesses. Victoria Treyger, Kabbage's chief marketing officer, said that while a customer's FICO score -- which looks at payments history -- plays an important role in determining risk, it's not the only piece of the puzzle. Kabbage also considers data from sites such as eBay, Facebook, Twitter, PayPal and others.

"Small businesses are incredibly dynamic and they're changing all the time," Treyger said in an interview. "To understand the true color of the business, we wanted to use something more real-time and current than a FICO score, which is still useful to us."

Treyger was quick to note that loan applicants voluntarily grant Kabbage access to their various accounts in order to collect data via APIs, and said that access can be revoked at any time. The social data Kabbage derives from the accounts is not the sole factor in determining whether or not to award a loan, either. But, the company says, it has made a direct correlation between positive social data and lower delinquency rates -- to the tune of 20%.

One of the variables that Kabbage takes into account is how active and engaged the loan applicant is in social media, Treyger said. This may include how often the business is commenting and interacting with customers on sites such as Facebook and Twitter and the overall sentiment of the comments from the business' customers.

"Small businesses use social as a CRM to connect with customers and keep them updated," she said. "If that small business owner is using Twitter to post updates on sales or promotions, we know that the business is focused on growth. If they're responding to and managing customer service issues, we can see that they're on top of their business and that they value good relationships with their customers. These are important factors to us."

Another company, Lenddo, targets individuals in need of loans and has a similar approach in using social data. Like Kabbage, Lenddo requests access to your social media accounts -- such as Facebook, LinkedIn and Twitter -- in order to generate a "LenddoScore" that determines your creditworthiness.

"By integrating with [social networks], Lenddo makes it easy to get and give references," said Lenddo CEO Jeff Stewart. "Who you associate with, your reputation and who is willing to be a reference are all good indicators of trustworthiness."

Your LenddoScore is based on several factors, including the nature of the people you're connected with. If the friends you interact with most on social media are not deemed "positive contributors to the community," your score drops. Lenddo determines this based on your friends' social data and their payment behavior with Lenddo products.

Lenddo's Stewart said in an interview that he believes this model is sustainable and that it's the future of finance. "We are using the efficiency of the Internet and big data techniques to administer credit in a proven manner," he said. "Someday social data will help lower costs for insurance, fund transfers and even payment processing. With less risk, there should be lower costs for honest people."

Kabbage's Treyger agreed, saying she believes this is a trend that will eventually catch on with bigger lenders. "My prediction is that you're going to find larger financial institutions, such as banks or insurance agencies, start to look at social activity as part of determining whether they want to work with a new customer," she said.

But CreditSesame.com's Ulzheimer isn't quite as convinced. He said that, despite the buzz these new loan companies are generating around their use of social data, he's still skeptical of their long-term success.

"There are certain things in our control and not in our control when it comes to loan applications. The consumer has almost no control over the credit reporting process; we're innocent bystanders," Ulzheimer said in an interview. "But when it comes to social media, it's the opposite. We have complete control over who we friend and how we act. The minute people see that their online activity is influential, it's not going to take long for anyone to figure out how to game the system."

Ulzheimer notes that the success of using social data points to determine risk -- and arrive at other potential conclusions about a customer -- hinges on whether or not other businesses can actually prove their claims. But if lenders do determine that social data is a viable metric to measure whether or not a person or company is reliable, Ulzheimer says it could be something companies consider when doing business with others.

"The only way social media data would be used to decide whether or not to do business is if that data is actually meaningful," he said. "So if your Facebook activity suggests that you're less likely to be a profitable prospect, then it's completely reasonable to expect that businesses may not want [to do business with you]."

The bottom line, Ulzheimer said, is that consumers -- and businesses -- need to understand that their social activities don't go unnoticed. "It's not just the social networks that are watching you, but now there are people outside who are extremely interested in what you're doing," he said. "This just underscores the need to be careful of who you friend and how you act. This is something that no one would have imagined when Facebook launched years ago. No one could have thought it might someday play a part in something like risk assessment."

Whether the economic environment is GǣfriendlyGǥ or not, small businesses will turn to any available funding source to secure lines of credit and get funding to smooth out bumps in cash flow and availability. Getting credit is always a challenge, even in the best of times. When the economy stalls and times are tough, getting the necessary cash to support the business gets even tougher. It's interesting that social media is becoming part of the finance puzzle, and is a testament to the nature of the information to be gained via social platforms. Kind of cool, but kind of scary, too.

I understand how important it is for a small business to have strong social media presence and that maybe the rule of a bird of a feather flock together which makes sense. I have always been of the order that word of mouth can make or break a small business especially in a small community. I have always been one that believes that a score by the top three that can be hacked by the least savvy should not be a strong determination in whether a small business is worthy of their loan critique and sometimes it does matter in who you know instead of how prosperous your business may be. This does have some merit and I look forward to see where it goes from here.

Young people in the future, especially first time borrowers, may have to turn in access to their social media accounts in order to get a mortgage. That's sort of like the bank asking in an earlier age to read all your letters and personal mail. Yes, that could help establish your character but businesses used to have to base their judgment of your character on something other than an ability to poke into your private affairs. The digital age may be institutionalizing the practice.

I think this would hurt individuals, and I hope it doesn't. A lot of people, including myself, interact with family members and friends on social media accounts -- at their leisure. If someone decides to avoid interaction with social media sites on a personal level, this could hurt their credit when they might have great credit otherwise.

I think there is at least some benefit to this. If you are a serious start-up, and you need a loan, the bank will see that you are serious about carrying through and are dedicated to ensuring the business is successful (and thus paying back your loans) if you are actively involved with customers on social media. If you aren't, you might take the same bare-minimum approach with your business, meaning you may not necessarily do well in business.